Macro 21

The tax cut will have a smaller impact on aggregate demand in the economy with the

higher sensitivity to changes in the interest rate

Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is________ , and the spending multiplier for this economy is__________

1. 0.6 2. 2.6

Suppose the government in this economy decides to increase government purchases by __________The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to_____________ This increases income yet again, causing a second change in consumption equal to______________The total change in demand resulting from the initial change in government spending is$1 trillion Correct .

1. 240 billion 2. 144 billion 3. 1 trillion

Suppose the government decides to intervene to bring the economy back to the natural level of output by using _________policy

1. A contractionary

After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to_____________ by$__________ at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the____________effect.

1. Decrease 2. 2 billion 3. crowding-out

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will__________ the cost of borrowing, causing residential and business investment spending to____________and the quantity of output demanded to _________at each price level.

1. Incresase 2.Decrease 3.Decrease

Which of the following statements about the debate over stabilization policy are correct? Check all that apply.

1.Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses. 2.Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.

Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open-market operations to_____________ the____________money by ____________ the public.

1.Decrease 2.Supply Of 3.Selling bonds to

The change in the interest rate that you found previously will cause residential and business investment spending to______ , leading to__________ in the quantity of output demanded in the economy.

1.Fall 2.A decrease

After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be_______t than the quantity of money supplied by the Fed at this interest rate. People will try to___________ their money holdings. In order to do so, people will_________ bonds and other interest-bearing assets, and bond issuers will find that ________________ interest rates until the money market reaches its new equilibrium at an interest rate of________

1.Greater 2.Increase 3.sell 4.have to offer higher 5. 12%

Which of the following are examples of automatic stabilizers? Check all that apply.

1.Unemployment insurance benefits 2.Personal income taxes 3.Corporate income taxes

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending of________ by___________

1.fall 2.1 billion

#3 The tax cut will have a larger impact on aggregate demand in the economy with the

Permanent tax cut

Shift the aggregate demand curve on the graph to show the impact of a tax hike.

Shift left

Shift the aggregate demand curve on the graph to show the impact of a tax cut.

Shift right

Suppose that in March the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output given in the previous scenario. In July 2020, consumer confidence decreases, leading to a decrease in consumer spending. Because of the________associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely________________________ once the effects of the policy are fully realized.

1.Lags 2. Push the economy below the natural level of output

Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply.

1.The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. 2.Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

The tax cut will have a larger impact on aggregate demand in the economy with the

Larger MPC